Stock Market Investing Tips: Everyone is looking for a quick and easy way to riches and happiness. It seems to be human nature to constantly search for a hidden key or some esoteric bit of knowledge that suddenly leads to the end of the rainbow or a winning lottery ticket.
1. Set Long-Term Goals.
Why are you considering investing in the stock market? Will you need your cashback in six months, a year, five years or longer? Are you saving for retirement, for future college expenses, to purchase a home, or to build an estate to leave to your beneficiaries?
Before investing, you should know your purpose and the likely time in the future you may have need of the funds. If you are likely to need your investment returned within a few years, consider another investment; the stock market with its volatility provides no certainty that all of your capital will be available when you need it.
2. Understand Your Risk Tolerance.
Risk tolerance is a psychological trait that is genetically based but positively influenced by education, income, and wealth (as these increase, risk tolerance appears to increase slightly) and negatively by age (as one gets older, risk tolerance decreases). Your risk tolerance is how you feel about risk and the degree of anxiety you feel when risk is present.
If you choose to invest with a Robo-advisor like Betterment, your risk tolerance will be a major factor in selecting different investments.
3. Diversify Your Investments.
Experienced investors such as Buffett eschew stock diversification in the confidence that they have performed all of the necessary research to identify and quantify their risk. They are also comfortable that they can identify any potential perils that will endanger their position, and will be able to liquidate their investments before taking a catastrophic loss.
Andrew Carnegie is reputed to have said, “The safest investment strategy is to put all of your eggs in one basket and watch the basket.” That said, do not make the mistake of thinking you are either Buffett or Carnegie – especially in your first years of investing.
Betterment, as well other many other Robo-advisors, will make sure your investment portfolio stays diversified and balanced over time. When it starts to get out of balance, it will make the necessary adjustments for you.
4. Control Your Emotions.
The biggest obstacle to stock market profits is an inability to control one’s emotions and make logical decisions. In the short-term, the prices of companies reflect the combined emotions of the entire investment community. When a majority of investors are worried about a company, its stock price is likely to decline; when a majority feel positive about the company’s future, its stock price tends to rise.
Stock prices moving contrary to our expectations create tension and insecurity. Should I sell my position and avoid a loss? Should I keep the stock, hoping that the price will rebound? Should I buy more?
5. Handle Basics First.
Before making your first investment, take the time to learn the basics about the stock market and the individual securities composing the market. There is an old adage: It is not a stock market, but a market of stocks. Unless you are purchasing an exchange-traded fund (ETF), your focus will be upon individual securities, rather than the market as a whole. There are few times when every stock moves in the same direction; even when the averages fall by 100 points or more, the securities of some companies will go higher in price.
Knowledge and risk tolerance are linked. As Warren Buffett said, “Risk comes from not knowing what you are doing.”
6. Avoid Leverage.
Leverage simply means the use of borrowed money to execute your stock market strategy. In a margin account, banks and brokerage firms can loan you money to buy stocks, usually 50% of the purchase value. In other words, if you wanted to buy 100 shares of a stock trading at $100 for a total cost of $10,000, your brokerage firm could loan you $5,000 to complete the purchase.